Health Care and the Dynamics of Intervention

At the heart of the government’s defense of its health insurance mandate is the premise that, as Wall Street Journal reporter Jess Bravin puts it, “40 million uninsured Americans are distorting the health-care market by shifting costs of free emergency-room care to taxpayers and insurance ratepayers.”

In other words, the government believes that there is an externality problem with health insurance. If healthy people aren’t compelled by law to buy insurance, then they will drop out of the insurance pool. This will mean that the average health level of those who remain in the pool will decline. This, in turn, will raise the cost of insurance for all remaining members of the pool.

Of course, insurance companies have a way of dealing with this by attempting to charge people for the (statistical) cost that they impose on the pool. They can do this by charging higher rates for riskier people such as those who are overweight or those who are smokers (this, by the way, is why kids with bad grades pay higher rates for their auto insurance). But the government doesn’t like this solution because it means that some people who are higher risk through no fault of their own (for example, those with unlucky genetics), may end up paying higher rates. So the Patient Protection and Affordable Care Act made it more difficult for insurance companies to charge higher rates to higher risk customers (this is known as “community rating”). They also made it impossible for these companies to deny care to those with preexisting conditions.

According to the Journal, plaintiff’s attorney Michael Carvin doesn’t buy this reasoning. In yesterday’s oral argument he averred:

In other words, he agrees that there is an externality problem but it is entirely of the government’s making; it isn’t in any way inherent to the industry. There would be no externality if those who defaulted on their health care providers could be held liable.

Image by Duncan Lock

This is an example of what economists call the “dynamics of intervention.” Sanford Ikeda explores the concept in his 1997 book on the topic and credits Ludwig von Mises for its initial development. The basic idea is that one intervention often begets further interventions. Once government says that doctors can’t sue patients for defaulting on their bills and once government says that insurance companies can’t charge higher prices to riskier clients, then the argument for forcing everyone to buy insurance becomes stronger.

(Economists who aren’t familiar with Mises’s or Ikeda’s arguments will still recognize them as a version of “the theory of the second-best” BTW: read the link; it remains one of my favorite blog posts five years after first reading it).

The dynamics of intervention are strong enough to convince plenty of otherwise free-market advocates to countenance new government intervention in the marketplace. Milton Friedman, for example, famously said that as long as we have a welfare state, it makes sense to regulate the border. And a lot of free market advocates are willing to say that as long as we have Federal Deposit Insurance, the government should be allowed to regulate the risk profile of banks.

Of course, the other interpretation of the dynamics of intervention is that you shouldn’t start down the path to intervention in the first place because it will inevitably lead to much more intervention than you initially intended. That’s my take on it, at least.

I’ll end this already-long post by noting that Congress might have gone about this a different way and greatly reduced the dynamics of intervention problem. Instead of making it impossible to deny care to those with preexisting conditions, and instead of requiring community rating, and instead of requiring everyone to buy insurance, Congress might have left the insurance market alone and reformed Medicaid. It could have turned Medicaid into a voucher program that would allow qualifying recipients to use their voucher to either purchase insurance, or–in the event that no insurers will pick them up–to purchase health care services on the open market. If they were so inclined, Congress could have made the voucher more generous for those with pre-existing conditions (ideally, people wouldn’t be eligible for more generous benefits if they brought on the pre-existing condition themselves through their own health decisions). These reforms would best be coupled with other market-oriented reforms such as equalizing the tax treatment of employer-provided and individually-purchased insurance, legalizing the cross state purchase of insurance, and reforming medical malpractice laws.

My own view is that the most vulnerable in society would be best served by a robust private and charitable market (consider how well the poor are served by our mostly-private markets for necessities like food and clothing). The next best option would be for the states to develop their own safety nets. But the federal reforms in the preceding paragraph seem to me to be far superior to both the status quo and the mess that is PPACA.

It is possible although rarely fruitful to legally pursue non-paying patients. If one requires prepayment or hefty deposits for elective procedures prior to service – for example – the patient simply fails to pay, fails to schedule and fails to get care. It may then fall to them to get emergency care via an ER visit – which may then require the On Call Specialist to provide the previously recommended care and THEN pursue payment – after the fact. Or the patient is referred to the office in the specialist – and the cycle spins again.
It splits into two segments:
1. The expectation of first dollar coverage or freedom from any price or cost for office-based care, or
2. The expectation of free care upfront with an “I’ll pay this out over time” promise of limited value.
3. And of course the “Evil Hospital” is expected to swallow the bill whole.
Next one is left with pursuit via Collection services, then Small Claims mechanisms – costly, discounted and often useless.
I do not like the constitutional issues regarding a “mandate” but if there exists no mechanism to spread the cost of non-elective care that is in itself mandated (see EMTALA…) then there is no way to control cost of care short of price-controls that then destroy the market and its providers. You cannot have mandated care without a mechanism to mandate payment.

http://www.facebook.com/freshcut Bob Swartwout

Exactly. Please keep repeating, loudly!

RobertArvanitis

As requested, a repetition and additional interesting fact.

Uninsured motorists are about 15% of the auto market, yet no one wants to national property & casualty insurers.

(Oops. Did we just give liberals a new idea?)

Erich Ocean

Uncompensated health care is 3% of the industry, which is less than, for example, the loss rate from theft in retail.

It is completely unreasonable to create an individual mandate to “fix” this non-problem.

http://twitter.com/harvardr Harvard Fong

Of course, we should all have some idea of the baseline from which we start. To wit, if you don’t have insurance, you don’t get treatment, including emergency room. Which will mean some die in the street and others remain untreated and lead lives ranging from minor discomfort to unrelieved agony. Saves money for sure and eliminates the “free rider” effect. Now where do we go from there, if we wish to?

Frankjnatoli

I see nothing in the article about refusing treatment. The article suggests compelling payment after treatment. That’s quite different.

http://profiles.yahoo.com/u/F4WUZSJPPOLAWI5IXAF4NZS67I Mitch

How about a free market alternative to the Emergency Room. How about a place like Wal-Mart for non life threatening medical treatment. A place where a registered nurse over-see’s non union technicians preforming treatments. A place where when you enter you are consenting to whatever MIGHT happen and all lawsuits are illegal. A place where I can look at a price list before I decide which treatment suits me best.

This current idiocy of using emergency rooms for twisted ankles and fingers with a cut on it or less and having insurance pay for it shows the absurdity of a Govt relying upon “good intentions” to create laws instead of economic reality and human nature.

Govt loves insurance, it’s the economic black hole they so desire.

Basementthought

What you’re suggesting is that injured poor people waive their legal rights, specifically the right to seek damages for harm done by others. That sort of business model- forcing desperate people to waive legal rights in exchange for relief to a crisis- smacks of exploitation